Participation in governance from validators, token holders, and community members is a sign that a network is organized and run by a community of stakeholders, not just the founding team. The ultimate goal of governance processes is to align all stakeholders behind the project and continually improve the project to remain adaptable, relevant, and sustainable. When Figment engages in research or governance activities in the space, we’re thinking about growing participation at every step.
Some of the best online governance communities stem from open source software communities. Python’s community informs Bitcoin and Ethereum’s off-chain governance format of Improvement Proposals. These communities need a system to coordinate, i.e., share information, suggest improvements, and solve problems across time zones with additional resources to discuss and resolve issues.
A Framework for Governance
Governance enables stakeholders to make decisions about a network, platform, protocol, and ecosystem.
Generally, we think about governance as coming in two layers: technical improvements and blockchain design.
Technical improvements are referred to as ‘layer one.’ These usually patch crucial vulnerabilities when there are unforeseen consequences. These changes may be related to the economics of the token or the underlying parameters of a network that control inflation rates, validator payouts, or general bug fixes.
It is important to note that layer one governance can happen without proposals or voting. These are fixes and upgrades that have to happen, regardless of community support. Node operators need to abide by them to ensure the continuing security of a network.
Celo implements a system called “hotfixing.” When a security vulnerability is found, anyone can make a governance proposal to deploy a hotfix. If that proposal is approved by a multi-sig member and a quorum of validators, the hotfix is deployed. Hotfixing isn’t a transparent process because proposers do not want to reveal the vulnerability to bad actors.
In September, Solana’s chain halted due to an increased transaction load. The high transaction load caused problems in the queue and this created a “lack of prioritization of network-critical messaging.” This caused the network to start forking. Validators organized themselves in Solana’s discord channel to reach consensus on when to upgrade to the newest client that Solana’s team launched.
Both of these examples highlight the critical aspect of layer one governance decisions. The team and other core contributors have to act fast to patch vulnerabilities or upgrade a network through processes that may be opaque, expedited, and centralized.
Layer two governance directs how community treasuries are spent, and discretionary changes are made regarding users’ experiences. These discretionary changes may be regarding mechanisms to lower the gas prices (like EIP 1559) or other usability challenges for users (UX improvements, etc.). This layer is dedicated to improving a network.
Ethereum researchers, Core Developers, and community members discussed EIP 1559 for the better part of 6 months before miners implemented it on the blockchain. Community funds often face different levels of scrutiny throughout the process. Layer two proposals are reasonably transparent, undergo lengthy discussions, and involve a variety of stakeholders.
By thinking about governance in this way, we can better address a) which governance proposals are necessary for the security of a network and b) which proposals are necessary for a network’s health.
Goals of Online Governance
The purpose of having decentralized governance on blockchains is to provide a platform where the core team and founders can relinquish control over their network. When the governance of a network is decentralized, it’s is in the hands of validators, token holders, community members, investors, and the core team. The weight of decision-making on the platform is in the hands of these groups and does not rest entirely on one group in particular. When this happens, a network can create design improvements and technical improvements in the best interests of token holders and infrastructure providers, not just the core team.
The responsibility and direction of a network rests on the shoulders of all interested parties. Governance provides everyone a seat at the table and allows a diverse assembly of voices to be heard. All stakeholders have a right to participate and are incentivized to join in efforts to improve the ecosystem around it.
Online governance’s goals include coordinating people across time zones and attention spans to improve the collective. This collective could be centered around governing a code repository, an online encyclopedia, or the entirety of Web 2. Without internal structure and expertise, internet users’ daily projects would not be as large, successful, and well-known as they are today.
Governance is how decisions are made on a network. When the governance is in the hands of individuals, the direction of the protocol will benefit from network effects and continue improving to further adoption of the services.
Goals will vary depending on the project’s use case. Generally, online governance communities should have a dedicated system that provides:
- The overarching ideals, goals, and principles of the project
- Concrete information on what the project is
- A place to describe design changes
What does good governance look like?
Good forms of governance are the ones that can provide communities with the resources and expertise necessary to coordinate stakeholders across a network. Good governance engages participants and allows the community to have autonomy, separate from the organizing body of the protocol. Good governance enables individuals to spot issues, identify areas for improvement, and voice these concerns in an open environment.
Good governance in crypto and online spaces spurs opportunity for all the stakeholders in a network – all of whom should have a path to participate at an entry level. Often, non-technical people can engage a network, other than exchanging their tokens for a service, by participating in governance. Good governance will account for this. Platforms will recognize that individuals are directly incentivized to further the protocol’s advancement by discussing and raising issues. Without this structure, governance is ruled by layer one form of governance – emergency upgrades and troubleshooting code. This structure often does not encourage the ecosystem’s growth through spending community funds nor improving users’ experiences.
Concrete Steps in the Process
Most protocols’ governance processes follow a basic framework after discovering a place for improvement: discussion, research, and execution. Networks primarily take after Ethereum’s EIP process that is outlined here.
In the first step, someone identifies a problem. A user, developer working on a dApp, validator, or team member building the project discovers an issue or spots a place for improvement.
Second, this person or group that discovered the problem takes it to the forum or chat channel and describes their experience. Suppose it is someone who does not have experience working with development tools. In that case, this is an opportunity for them to connect with developers or the team directly to identify the problem and create a solution using the network’s tools.
During this time, they also formulate a proposal. This proposal details the problem they discovered initially, their proposed solution, any risks or drawbacks, the overall goals, and how it will impact the community.
This formal proposal will be introduced to the community for discussion and further improvements before being submitted for a vote. If the system uses on-chain governance, this vote will occur on-chain, and anyone on the network can implement the changes. If the system uses off-chain governance, the community will find a consensus on how to proceed that is not recorded on-chain. Then the core development team executes those changes on behalf of the community.
More participation provides resources and expertise. Nothing happens alone. Resources may include access to research and prior ways of doing governance on a network. Without access to these resources, a network either needs someone to lead the effort to establish this system or has an innovative person outside of it who can receive grant funding for their work.
Participation from validators and token holders during every step is a sign of an engaged community. It also supports the idea of a decentralized governance system. When there is no strong engagement from the community itself, governance often defaults back to the layer one type of governance where the team leads governance efforts by introducing proposals. Often the foundations behind the team will run several nodes on a network for security reasons. If that is the case, the foundation can control the amount of running infrastructure on the network. Including several validators, having all the voting power to pass the proposals on the network. This can lead to centralized governance and a network that is run entirely by the team. This is not in line with the principles of decentralization or holds up to the ethical standards of the marketplace.
Governance Needs Long-Term Support
Flexibility is necessary for a protocol to remain sustainable, relevant, and active. Often, the team does not know everything about the developers’ or users’ experience and needs to rely on those two groups to support long-term improvements on the protocol. As users of the network diversify, they will need different support than the initial users at launch.
As the user base grows, the use cases of the network may change. Protocols need to be able to adapt to a new set of users as these use cases change. This diversity comes from developers building new tools and services that are crucial to token holders using those services in unique and creative ways. Ethereum’s governance needs constant maintenance as the ecosystem evolves, grows, and discovers new ways to create value.
Ethereum has needed to adopt different designs as more users have joined the network. As Ethereum grows user adoption, the gas prices for transactions increase. When the cost of transactions increases, they do not allow small token holders to use the network, and it costs large token holders hundreds of dollars to do business. In an effort to reduce transaction fees and ensure continued use, researchers introduced EIP 1559. It is an Ethereum Improvement Proposal that introduced a new mechanism for adjusting gas fees on the network. High gas costs are an ongoing issue and have yet to be resolved.
As application-specific networks like Akash, Sentinel, and e-Money gain traction, alongside platforms like NEAR, SKALE, and Solana, where developers can build a wider variety of applications, the need for long-term governance support to remain flexible will be critical.
Maintenance is more complex to sustain than launching new products. But governance is necessary for a network to be run by various stakeholders; there needs to be continuous support to improve a network.
Decentralization doesn’t happen at the initial launch of a network. Decentralizing and growing participation in the governance process takes time and attention. To achieve the goal of decentralized governance, the process needs to continually support community managers and forum moderators whose job includes stimulating conversation and targeting specific audience engagement in the process. A network’s governance will not be decentralized at launch. Since that is a goal of online governance and a value of Web 3, alongside long-term adoption – support for governance must happen over time.
Governance Systems for the Future
Figment has vested interest in the longevity of Web 3. We’re in crypto for the long-term; this includes how networks address their stakeholders and suggestions on ways to improve. Governance is a way to further decentralize and allows individuals to claim ownership over a network. Good governance and improving governance will lead to better methods for large, decentralized communities to strengthen protocols over time, leading to sustainable community development and economic growth.
We are present members of these communities, and we have a stake in establishing these communities. As a part of running validators on these networks, we have to remain engaged to ensure liveliness. We learn about these networks and can target where the network needs improvements while working on these networks. Our ability to work across networks allows us to be critically thinking about infrastructure and coordination. The breadth of networks that we have experience staking opens avenues for us to have a broader context in how to take part and influence the governance process.
Our track record of our decisions is in the best interests of a network. We are actively working towards having more transparency around our voting record. We’ve written material and published content on supporting our networks, in addition to participating in governance working groups on Cosmos and Celo.
The health and security of a network does not just rely on security models and infrastructure. Networks can flourish through relinquishing control of their governance to all the stakeholders. At the same time, Figment will continue to participate in this process and find opportunities to further a network’s goals using our understanding of online research and breadth of experience.